REPORT BY
THE CENTER FOR ECONOMIC DEVELOPMENT
Published with the support of:
ECONOMY
JULY 2005
REPORT BY THE CENTER FOR ECONOMIC DEVELOPMENT
THE BULGARIAN ECONOMY
JULY 2005
Editors in charge: Alexander Boshkov, George Prohasky Ph.D., Karassimir Petrov Ph.D.
This report was prepared by: Anelia Damianova Ph.D., Aneta Slancheva, Blenika Djelepova, Daniela Petrova, Emil Kalchev Ph.D., Georgi Mihaylov, Ivo Zhelev, Karassimir Petrov Ph.D., Liliana Doudeva, Magdalena Varshilova, Manyo Moravenov, Maria Prohaska Ph.D., Marieta Tzvetkovska, Nikolay Ivanchev, Petar Stankov, Stanislav Slavov, Zdravko Ivanov
support the economic development of Bulgaria through encouragement of public debate on economic issues and development of economic policy options.
CED thanks Open Society Institute, New York/Budapest for its support to the overall activity of the Center.
© Agency Economica Ltd., 2005 1408 Sofia, 1 Balsha St., bl. 9 e-mail: aeconomy@ced.bg
ISBN: 954-9394-10-7
Translation: Translingua Ltd.
Design and prepress: Factor Advertising Ltd.
Print: IKO BUSINESS Ltd.
The information published in the report may be used without special authorization but with the explicit reference to the source.
Abbreviations Used ... 4
List of Figures and Tables ... 6
Summary ... 7
Macroeconomic Dynamics ... 12
Business Climate ... 19
Enterprise Policy ... 21
Public Finance ... 33
Social and Health Policy ... 39
Environmental Policy ... 47
Banking System ... 49
Capital Market ... 53
Energy Sector ... 58
Transport ... 60
High Technology and Communications ... 62
Tourism ... 64
Agriculture ... 69
Regional Policy ... 72
Amendments to Legislation Relative to the Economy ... 76
In Focus: “Bulgarian Labor Market Analysis and Improvement" Authors: Magdalena Varshilova, Petar Stankov, Liliana Dudeva ... 83
Annex 1: Main Macroeconomic Indicators ... 87
Annex 2: Promulgated Regulatory Documents ... 100
Methodological Notes ... 104
The Center for Economic Development in the Period April – June 2005 ... 107
CONTENTS
CONTENTS
ABDI ... ACT ON BANK DEPOSITS INSURANCE ACB ... ASSOCIATION OF COMMERCIAL BANKS AD ... JOINT-STOCK COMPANY
AEAF ... AGENCY FOR ECONOMIC ANALYSIS AND FORECASTS ASIFC ... AGENCY FOR STATE INTERNAL FINANCIAL
BAPIC ... BULGARIAN ASSOCIATION OF SUPPLEMENTARY PENSION INSURANCE COMPANIES BATA ... BULGARIAN ASSOCIATION OF TOURIST AGENCIES
BCCIBSP ... BULGARIAN CHAMBER OF COMMERCE AND INDUSTRYBULGARIAN SOCIALIST PARTY BCCP ... BORDER-CROSSING CHECK POINT
BDIF ... BANK DEPOSITS INSURANCE FUND
BEIA ... BULGARIAN EXPORT INSURANCE AGENCY BNB ... BULGARIAN NATIONAL BANK
BPU ... BULGARIAN PEOPLE’S UNION BRS ... BULGARIAN RIVER SHIPPING
BSE – SOFIAGTD .... BULGARIAN STOCK EXCHANGE – SOFIA ADGENERAL TAX DIRECTORATE BSP ... BULGARIAN SOCIALIST PARTY
BTC ... BULGARIAN TELECOMMUNICATION COMPANY CEE ... CENTRAL AND EASTERN EUROPE
CEFTA ... CENTRAL EUROPEAN FREE TRADE AGREEMENT CHPL ... COMBINED HEAT AND POWER PLANT
CITA ... CORPORATE INCOME TAX ACT CoM ... COUNCIL OF MINISTERS
CPC ... COMMISSION FOR PROTECTION OF COMPETITION CRC ... COMMUNICATION REGULATORY COMMISSION DFI ... DIRECT FOREIGN INVESTMENTS
DSB ... DEMOCRATS FOR STRONG BULGARIA EA ... EMPLOYMENT AGENCY
EAPSME ... EXECUTIVE AGENCY FOR PROMOTION OF SMALL AND MEDIUM-SIZED ENTERPRISES EC ... EUROPEAN COMMISSION
EU ... EUROPEAN UNION
FSC ... FINANCIAL SUPERVISION COMMISSION GDP ... GROSS DOMESTIC PRODUCT
GGE ... GLASSHOUSE GAS EMMISSIONS GS ... GOVERNMENT SECURITIES GVA ... GROSS VALUE ADDED
IBCD ... INTERNATIONAL BANK FOR COMMERCE AND DEVELOPMENT ICT ... INFORMATION AND COMMUNICATION TECHNOLOGY
IEPS ... INSTITUTE FOR EDUCATIONAL POLICIES AND STUDIES II... INVESTMENT INTERMEDIARY
IPA ... INVESTMENTS PROMOTION ACT IT ... INFORMATION TECHNOLOGIES
MAF ... MINISTRY OF AGRICULTURE AND FORESTRY MEW ... MINISTRY OF THE ENVIRONMENT AND WATER MF ... MINISTRY OF FINANCE
MLSP ... MINISTRY OF LABOR AND SOCIAL POLICY MoE ... MINISTRY OF ECONOMY
МoES ... MINISTRY OF EDUCATION AND SCIENCE MoF ... MINISTRY OF FINANCE
MRL ... MOVEMENT FOR RIGHTS AND LIBERTIES
MTC ... MINISTRY OF TRANSPORT AND COMMUNICATIONS NA ... NATIONAL ASSEMBLY
NAMRB ... NATIONAL ASSOCIATION OF MUNICIPALITIES IN THE REPUBLIC OF BULGARIA NCC ... NATIONAL CHAMBER OF CRAFTS
NDP ... NATIONAL DEVELOPMENT PLAN
NFI ... NON-FINANCIAL INSTITUTION
NHIF ... NATIONAL HEALTH INSURANCE FUND NIF ... NATIONAL INNOVATION FUND
NMB ... NAVIGATION MARITIME BULGARE
NMSS ... NATIONAL MOVEMENT SIMEON THE SECOND
NPP ... NUCLEAR POWER PLANT NUCLEAR POWER PLANT NRA ... NATIONAL REVENUE AGENCY
NSI ... NATIONAL STATISTICS INSTITUTE NSSI ... NATIONAL SOCIAL SECURITY INSTITUTE NVMO ... NATIONAL VETERINARY MEDICAL OFFICE OPF ... OCCUPATIONAL PENSION FUND
PA ... PRIVATIZATION AGENCY
PIC ... PENSION INSURANCE COMPANY PITA ... PERSONAL INCOME TAX ACT
POSA ... PUBLIC OFFERING OF SECURITIES ACT PPA ... PUBLIC PROCUREMENT AGENCY PPA ... PUBLIC PROCUREMENT ACT
PPPCA ... PRIVATIZATION AND POST-PRIVATIZATION CONTROL ACT PPR ... PUBLIC PROCUREMENT REGISTER
RB ... REPUBLICAN BUDGET
SADC ... SWISS AGENCY FOR DEVELOPMENT AND COOPERATION SEU ... SOUTH EASTERN EUROPE
SME ... SMALL AND MEDIUM SIZED ENTERPRISES SSC ... SOCIAL SECURITY CODE
TIPC ... TAX-INSURANCE PROCEDURE CODE TPC ... TAX PROCEDURE CODE
UDF ... UNITED DEMOCRATIC FORCES UPF ... UNIVERSAL PENSION FUND
USAID ... UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT VAT ... VALUE ADDED TAX
VPF ... VOLUNTARY PENSION FUND
ABBREVIATIONS USED
ABBREVIATIONS USED
Figure 1. Value added by economic sector, growth on corresponding quarter of previous year, % ... 12
Figure 2. Exports and imports, growth on corresponding quarter of previous year, % ... 13
Figure 3. Current transfers in January – April of corresponding year, net, in million leva (BGN) ... 14
Figure 4. Change in consumer prices on previous month , % ... 16
Figure 5. Contribution of market and non-market inflation to general inflation, percentage points ... 16
Figure 6. Change in market consumer prices on previous month, % ... 16
Figure 7. Contribution to changes in prices of goods and services groups to market inflation, percentage points ... 16
Figure 8. Changes in producer prices on previous month by product group, % ... 16
Figure 9. Contribution to changes in producer prices on previous month by product group, percentage points ... 16
Figure 10. Change in consumer prices and industrial producer prices on domestic market, previous month = 100 (%) .... 17
Figure 11. GVA, employed persons and GVD per employed person, total for the economy – growth on corresponding period of previous year (%) ... 17
Figure 12. Registered unemployed persons, number ... 18
Figure 13. Business Climate Dynamics ... 19
Figure 14. Dynamics in the condition of companies ... 19
Figure 15. Share of companies having four or more advantages (April 2003 – April 2005) ... 19
Figure 16. Expectations for change in the business condition over the next quarter? ... 20
Figure 17. Share of companies agreeing to the statement „I experience a shortage of financial resources needed for current operations” ... 20
Figure 18. Scope of corruption practices ... 31
Figure 19. Expectations on the spread of corruption over the 2007–2008 period ... 31
Figure 20. SOFIX dynamics in the period 01.01.2005 – 30.06.2005 ... 53
Figure 21. BG40 dynamics in the period 02.02.2005 – 30.06.2005 ... 53
Figure 22. Structure of trading by industry in Q2 of 2005 ... 55
Figure 23. Price dynamics of CI and IV in the period 01.01.2005 – 30.06.2005 ... 56
Figure 24. Spot Crude Oil Price Dynamics for WTI, Brent and Dubai Grades ... 59
Figure 25. Bulgarian ICT market volume (million EUR) ... 62
Figure 26. Total bankcards issued (2002–2005) ... 63
Figure 27. Total ATM and POS terminals installed (2002–2005) ... 63
Table 1. GDP, growth on corresponding period of previous year, % ... 12
Table 2. Gross capital formation financing ... 13
Table 3. Expectations in corresponding month of 2005 of increases in selling prices in the next three months ... 17
Table 4. Thresholds for investments according to investment classes ... 22
Table 5. Efficiency on measures to reduce corruption ... 32
Table 6. Budget surplus/deficit for respective year (in million BGN) ... 33
Table 7. Insured individuals in pension funds ... 43
Table 8. Net assets available in pension funds ... 43
Table 9. Market shares of PICs ... 43
Table 10. Investments of pension funds in various financial instruments ... 44
Table 11. Insured individuals and funds transferred, by PIC, during the first quarter of 2005 (net result) ... 44
Table 12. Market capitalization of BSE ... 54
Table 13. Market statistics of BSE – Sofia for Q1 and Q2 of 2005 ... 54
Table 14. Average daily liquidity of BSE – Sofia for Q1 and Q2 of 2005 ... 55
Table 15. Electricity prices ... 59
Table 16. Projected growth in the number of tourists, 2005 (in %) ... 64
Table 17. Training for the unemployed and the employed ... 85
In the first quarter of 2005, the Bulgarian economy registered record-breaking growth, and we are expecting an equally strong second quarter due to the extra election spending, which encourages consumption. Particularly positive is industrial growth, which registers twice the growth from 2004 Q1.. Export growth is higher than import growth; if this trend continues, it could have a positive effect on the high foreign trade deficit, which is a risk factor for the economy. An important positive economic development represents labor productivity growth, which follows last year’s decline caused by the encouragement of low-productivity employment. The Estat index registered higher values after the seasonal decline in January, and the positive mid-term trend is expected to persist. Positive strides have been made in enterprise policy and the new government will have to complete them. Efforts in privatization and concessions did not yield the expected results because of the poor organization and insufficient transparency of procedures.
Another important development related to the banking sector’s stability is the temporary halt of the credit expansion. The stock market has registered the longest downward price trend s for the last three years. Fiscal policy developments remain highly condemnable for (1) the uncontrolled spending and (2) the swelling budget surpluses. Critical is also the situation in the health sector, where election debates failed to outline clear paths for reform.
In the first quarter of 2005, real economic growth was reported at 6 per cent against the corresponding quarter of 2004, registering the highest Q1 GDP growth rate in the last seven years. A major growth factor was the spike in credit growth, with resources directed mostly to consumer consumption, which in turn promoted domestic supply.
In terms of production, total value added growth in the economy registered higher values compared to GDP growth. Growth in industry and services accelerated, with growth in industry outpacing growth in services, while decline in agriculture intensified. With a 52 per cent, the service sector accounts again for the highest share in GDP production. However, most notable in the first quarter of 2005 is industrial growth, which registered nearly twice the growth Q1 2004.
Unlike the trend observed in the previous three quarters, the accelerated total economic growth in terms of GDP consumption is now a result of the accelerated growth in final domestic consumption and of the delayed growth in investments and in the export of goods and services, and delayed growth in exports compared to imports. On the other hand, compared to the dynamics in the first quarter of last year, export of goods and services registered slight acceleration, whereas imports registered a slowdown. A possible resource for accelerated total economic growth is rather the growth in quality and capital productivity than the growth in the physical volume of investments. The record-breaking GDP growth in the first
quarter of 2005 is accompanied by a record high share in GDP of the goods and services deficit.
The credit-driven household consumption led to an abrupt change in the structure of the sources of investment finance.
The growth in the share of investments in GDP is a result of the growth in foreign savings and the decline in national savings.
In contrast to the lower electoral activity, NSI’s monthly business surveys registered intensifying economic activity in Bulgaria in Q2 2005. After the record economic growth in Q1, the record breaking business climate levels in the second four months give grounds for an expected strong or even accelerating growth above 6 per cent in Q2. The Q2 parliamentary elections will also contribute to growth. We project highest annual growth in construction, followed by industrial production, trade, and services.
In the first four months of 2005, the current account deficit deteriorated mostly because of the deteriorated balance of trade deficit and the higher deficit in services, income and current transfers. The balance of trade deficit (FOB) is up 4.4 per cent of the forecast annual GDP. The higher deficit in services is a result of deteriorated “Transport” and “Other Services” item, notwithstanding the positive dynamics in the “Travel” item.
In the review period the, “Other services (net)” item registers negative values, while it was positive in the same period of 2004. The increasing negative balance of Incomes is a result of the higher growth in paid income against received income.
Growth in paid income is mainly a result of the high growth of direct investment payments (mostly dividends and reinvested profit). Net inflow of current transfers registers decrease. While proceeds from money transfers by Bulgarians from abroad go up, proceeds from EU’s pre-accession funds decrease and Bulgaria’s payments on current transfers increase.
Growth in foreign trade continues at comparatively high nominal pace since the beginning of 2005. Growth in exports is slightly higher than growth in imports, but the trade deficit remains high at above EUR 1.2 b for the first four months of 2005. While this deficit is still pointed out as the highest risk for the Bulgarian economy, the adequate budgetary policy has helped to suppress the negative effect and to prevent higher indebtedness. The prime and raw materials produces by Bulgarian companies enjoy strong demand; some Bulgarian companies are performing well at the international markets; the export-oriented production of the new companies started up with foreign investments is gaining pace. This gives us grounds to believe that the Bulgarian economy has the capacity to maintain exports at high levels despite the stagnation of international markets with respect to certain products and the poor demand in the EU countries. Foreign trade dynamics will be determined yet again by the followings factors: (1) comparatively slow and irregular growth of the world economy; (2) delayed growth in international trade from 9 per cent in 2004 to 6.5 per cent in
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2005, and (3) higher oil prices. Besides, the increasing need for economic policy reforms with respect to some Bulgarian regions creates additional market uncertainty.
According to preliminary data, in the first four months of 2005, the inflow of foreign direct investments decreased from the previous year but the information about investors’ attitudes gives us grounds to project relatively high levels of foreign investments and a persisting trend. The factors that will contribute to this development include: comparatively high economic growth in Bulgaria, increasingly higher levels of harmonization of national with European legislation, improved business climate, strong government support, etc. We anticipate for the share of FDI in GDP to stand at above 10 per cent, which means that FDI will remain important for Bulgaria’s overall economic development.
Accumulated CPI for the first 5 months of 2005 is 2.55 per cent against 4.57 per cent for the last 12 months. In the period January–May 2005, CPI is mainly driven by the market price dynamics of consumer goods and services. Food price dynamics determines total market consumer price dynamics.
Domestic market producer price dynamics in industry shows that energy prices register the highest volatility. While the group of industrial products is characterized by the highest price dynamics, it is also the biggest factor for the overall producer price dynamics. Producer prices are characterized by a higher volatility than consumer prices, which is typical for a growing economy.
The higher economic growth in the first quarter of 2005 compared to the corresponding period of 2004 is accompanied by a slower annual growth in employment and lower decline in unemployment. In the first quarter of 2005, the economically active population decreased by 12 thousand people compared to Q1’2004, because growth in employment (54 thousand up) is lower compared to the decline in unemployment (67 thousand down). Employment in the private sector increased by some 90 thousand, while employment in the public sector decreased by some 40 thousand compared to the first quarter of 2004.
A very good indicator of the quality of total economic growth in the first quarter of 2005 is the fact that growth in labor productivity measured as gross value added per employed person is higher compared to employment growth. Employment dynamics had outpacing values last year.
The first four months of 2005 are the third quarter in a row with unemployment standing at levels below 400 thousand, according to labor force survey data. The unemployment coefficient (based on a labor force survey method) went down to 11.3 per cent registering a decrease of 2 percentage points against the first quarter of 2004. The first quarters of the previous two years register the highest seasonal values of the unemployment coefficient. The possible high growth levels throughout the year may contribute to further decline of
unemployment and of the unemployment coefficient. According to Employment Agency data, the downward trend in the monthly dynamics of registered unemployment continues.
In April, the value of the ESTAT Index of Business Climate in Bulgaria went up to 3.55 compared to its January value of 1.74. This is a precondition for a new peak value in July.
Given the seasonal dynamics of lower winter values and higher spring and summer values, we have grounds to believe that the upward trend persists. One cannot say what effect will election results have on entrepreneurs’ assessments, but still a positive mid-term trend (since the beginning of 2003), which has not exhausted its upward trend, is observed. Election suspense makes managers uncertain and this uncertainty is manifested in more negative environment assessments and careful optimistic expectations. Assessments about the condition of companies are positive.
As of mid 2005, enterprise policy registers positive development in areas like promotion of entrepreneurship and investments, access to finance, introduction of European standards, and improved business environment. Privatization process and concessions can be given negative assessments.
Lower number of regulations and simplified business environment remain government priorities. Some important events should be noted. A Strategy for a National Register of Legal Entities was approved in April. It envisages for the National Register to be a fact by 2006. The strategy outlines the priorities and implementation phases of a modern centralized electronic register system.
The public procurement system has been modernized through the start of Official Gazette’s web site and through the new public procurement register, which is a serious step towards simplified business environment. Amendments to the Official Gazette Act took effect on 1 May 2005. They envisage for public procurement notices under PPA to be published on Official Gazette’s web site. Thus, Bulgaria’s public procurement procedures will be better accelerated and made more transparent.
In an environment of a highly limited resource of state companies, the Privatization agency has focused since the beginning of 2005 on finalizing the big transactions in the energy sector. Political controversies delayed the approval of strategies and the subsequent privatization of companies in the defense industry, the inland water transport and the marine.
The concession process as a major source of finance for infrastructure maintenance and modernization did not develop according to expectations. The concession procedures for the big airports in Varna and Burgas were disputed in court, and the concession for Trakia highway, which was granted without any competition or tender, resulted in a couple of legal proceedings
and had negative repercussion in the international financial and investment circles.
Future efforts in enterprise policy and the improved business environment should be focused on a couple of key areas:
• Simplify and accelerate business registration;
• Provide full set of e-Government services and more dynamic competition in the supply of e-signatures;
• Facilitate bankruptcy procedures;
• Provide opportunities for out-of-court collection of intercompany debts;
• Pass the Promotion of Investments in SMEs Act, which has been delayed for some two years.
In the second quarter of 2005, public finance development is characterized by relative stability and persistance of major trends from previous periods. Two of the above trends, bulging budget surpluses and the chronic absence of a meaningful concept on handling the fiscal reserve generate increasing concern because the combination of these two hinders Bulgarian economic growth. At the end of May, the budget surplus reached BGN 994.8 m because of the excessively high indirect and income taxes. If this trend persists, budget surplus will amount to some BGN 2 000 m by year-end. The fiscal reserve has been growing since February and as of 31 May stands at BGN 5 198.5 m.
The parliamentary elections were the central event in the second quarter of 2005. They marked the end of a public finance management style of inappropriate revenue and uncontrolled expenditure policy. On the other hand, elections became a battlefield of Bulgarian public finance management alternatives. Election discussions were focused on political forces’ views about the level of budgetary redistribution of funds and about tax structure and rates.
The latest data about employment, unemployment, and incomes reveal positive dynamics, which is a result of economic growth and business efforts towards expansion and restructuring. Unemployment data for May 2005 show the lowest unemployment level in the last five and a half years.
In recent years, it is increasingly difficult for companies to find properly qualified employees. This trend is observed in positions requiring higher education, as well as in those requiring secondary, specialized secondary education and vocational training. Everything goes to show that oversupply is in place only with respect to personnel with low education or no education. The reasons for this shortage (particularly in construction, tourism, and in certain regions) are rooted in the education system defects, the emigration, the absence of short-term and long-term forecasts of labor market needs, the underdeveloped retraining and continuing training system.
The considerable differences in the economic and social development of the regions also have their effect. Under these
circumstances, there will be a need to employ foreign nationals, on a seasonal basis for the present and later for longer periods.
This phenomenon is quite new for the Bulgarian labor market, but it will most probably expand and will require having in place an adequate policy.
If the pace of economic growth is preserved and if there is continuity in the policy of the new Bulgarian government, one should expect positive development until year-end. The positive trends of declining unemployment and creation of permanent and prospective jobs are expected to persist in the next months, given that a couple of significant grant aid projects are to be started with the support of PHARE and the World Bank in the regions of heavy unemployment.
The development of the reformed Bulgarian pension model continues with amendments to the legislation towards protecting the rights of insured persons and developing the supplementary pension insurance market. The supplementary pension insurance market continues its development at a high pace.
This positive trend is proved by the growing number of insured persons and the increasing net assets in pension funds, as well as by the relatively good return on pension fund investments.
CED projects for pension fund assets to reach BGN 1 b by end of 2005 and BGN 3 – 4 b by 2010.
The expert community engaged in constructive discussions on the ideas of Bulgarian pension model improvement of the major political parties and coalitions. The general view of the Bulgarian politicians in this field concerns in the first place the need to lower the insurance burden, on which the business has been insisting for quite some time, and the need to take effective measures to develop the supplementary pension insurance system. On the other hand, the political ideas for pension system changes differ in terms of the scope of proposed reforms and the method of their implementation. According to CED, the Bulgarian pension model has to be improved towards innovative measures for long-term financial stability of the state social insurance and development of an efficient investment and tax environment for development of the second and third pension pillars.
The inefficient Bulgarian health model has long been seriously criticized by the Bulgarian society as well as by EU representatives; however, the political will for reforms in this area is still rather weak. The major Bulgarian political parties and coalitions promised in their election platforms to take a number of measures in order to reform the health system and to provide quality and affordable health care, if the Bulgarians give them vote of confidence. However, there is still lack of a clear vision about the finance of reforms. Some common ideas of the Bulgarian politicians about health model reforms include the need to promote voluntary health insurance funds, to introduce competition of hospital institutions in order to improve the quality of healthcare and the operation efficiency of the sector, to provide guarantees for keeping the scope of
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business and preferential conditions for the medical staff in the event of privatization of health institutions, as well as the need to introduce personal electronic health cards of patients for the payment of health services.
Environmental policy issues include transposing the European legislation and formulating the 2007-2017 environment protection priorities in an Environmental Operational Program within the framework of the National Development Plan. The European Commission has provided a preliminary critical assessment of the results that Bulgaria has achieved in transposing the European environmental legislation and in implementing the environmental control mechanisms for environmental impact assessment of investment programs. While this assessment is largely a result of reconsidered impact mechanisms within the implementation process of the Lisbon goals and the Cardiff Process, in a domestic aspect it signals real problems in the management of environment protection activities.
In connection with the implementation of Directive 2003/87/EU concerning the participation in the greenhouse gas emission (GHGE) quota-trading scheme for the European Union, Bulgaria has started to develop National Quota Distribution Plans, which will cover two periods: 2007-2008 and 2008-2012.
According to the National Climate Change Plan, 250 m tons of emissions are set for participation in the European scheme.
MEW has identified 240 Bulgarian companies as potential quota distribution candidates. Bulgaria’s participation in the European emission-trading scheme, particularly in the initial phase of its implementation, is assessed as a chance that the industry will encourage business investments in environment- friendly technologies.
The banking system continues to dominate the financial sector and financial intermediation. The last quarter finally witnessed control of the spontaneous credit expansion, which threatened the Bulgarian banking system stability. As a result of BNB’s April regulation, the credit expansion was halted, though probably only temporarily. Against the background of shrinking bank lending and stabilized broad money during the last three months, there is no risk for the banking system in a short-term and mid-term perspective. We have to watch carefully whether the effect of the April regulation will wane and whether credit expansion will gather again momentum.
In the second quarter of 2005, capital markets are characterized by two major groups of events. The first concerns the changed capital market regulation and the second – the downward tend in stock prices, which has been the longest in the last three years. May be because security market players were waiting for the parliamentary elections and the results thereof, they were cautious in their trading, which resulted in some decline in BSE – Sofia’s total turnover against the previous quarter.
The slight downward trend of prices, observed in the first three months, persisted. This resulted in record-long decline
of the stock-exchange market capitalization after some three years of continuing upward price trend for nearly all types of securities. Despite the weak trade dynamics, the past quarter is characterized as rather intensive in terms of corporate events. On one hand because this is traditionally the period of annual meetings of shareholders and on the other hand an upward trend in the interest of close-end companies towards the financing opportunities provided by the capital market is emerging.
The energy policy of NMSS’s Government is definitely “for” the construction of a second nuclear power plant. Judging from the statements of the parliamentary-represented political forces, the political risk for the future of Belene NPP is negligible. The decision for the new plant was taken in an environment of highly fluctuating international prices of oil and oil products. The next government will have the very responsible task to distribute between the State and the private business the responsibility, risk and yield of the new NPP construction and operation. The development of an efficiently operational electricity market remains slow. The infrastructure, which will allow for a natural gas market to emerge, is yet to be built.
The efforts to attract private companies in the transport sector began to yield tangible results. The negative trend of appealing the results of the tenders and competitions for concessions and sale of state-owned assets is preserved. The way out of such situations is in the faster and more efficient court decisions.
The government programs of the leading political parties for the next mandate reveal that a will to construct Hemus and Trakia highways is in place. Such a will is logical in a period of elections, but the lack of clarity about the specific sources of finance for such projects questions the implementation.
Data about the 2004 volume of the information and communication technology (ICT) market came out in June – 2004 income exceeds EUR 1.7 b, including some 430 m of income generated by IT companies. The telecom sector growth on 2003 is over 12 per cent, while the figure for the IT companies is twice lower at 6.13 per cent. The higher growth of telecoms is explained by the quick entry of alternative operators and the new modern service provided by BTC.
Serious progress towards the use of ICT in education is expected to be achieved with the start of the large-scale program for connecting the Bulgarian school състем to the Internet.
Program contractors were specified in June. Projections are for 1000 schools to be connected during the first year of the project.
The summer tourist season started with justifiable optimism about successful tourism development and good revenues in the sector. Optimistic anticipations for a successful summer season are underpinned by modernized special infrastructure, hopes for good tourism – culture interaction producing a
diversified tourist product, efforts to diversify marketing and advertising. At the same time, excessive construction in the Black Sea resorts, the shortage of qualified personnel in tourism and the poor condition of the road infrastructure will hold this highly promising Bulgarian economic sector back this year as well.
The tendency towards improved organization and management of production in agriculture with its parallel ongoing decrease of its share in the Bulgarian economy is preserved. Decline of agricultural production is 1.7 per cent against 1 per cent in 2004. Thus, the share of this sector dropped to 5.5 per cent of GVA and 4.7 per cent of GDP. This is a result of the accelerated development of industry and services and the lack of sufficient investments to modernize the sector and put it on a modern technological basis. The basic priority of agriculture currently includes: transposing the European legislation, preparing the sector for Bulgaria’s accession to the EU and coping with the commitments and responsibilities of market opening. The fact that most of the recent remarks from the European Commission concern the fulfillment of commitments in agriculture shows how grave the problem is. The new MAF management will have to seriously lobby in order to have remaining regulations approved at accelerated pace and the missing administrative structures build and will also have to arrange for the necessary staff to be trained in order to comply with all European requirements.
This year is decisive for Bulgaria’s successful preparation to manage the money from EU’s cohesion and structural funds. This is one reason for the intensified regional policy work. A very important event, which encourages the process in this sphere as well, is the official signing of the Agreement for the Accession of Bulgaria and Romania to the EU on 25 April 2005.
Active measures include in the first place approval of a National Regional Development Strategy and work on the preparation of the National Development Plan and the operational programs to it. These documents will provide the framework for the use of the money from the European funds. The National Strategy is a fundamental strategic document for the implementation by Bulgaria of an efficient regional policy in line with European requirements. EU’s cohesion and structural funds and the active public-private partnership for the use of these funds are the basic implementation instruments for this regional policy.
Work on the preparation of the National Development Plan continued. The second forum within the broad discussion on the plan and its operational programs was organized in June.
The strengths and weaknesses of the individual operational programs were discussed in March and program goals and priorities were presented and discussed at the July forum.
These programs comply with the basic strategic priorities of Bulgaria’s development which were outlined in August last year – intensifying the economic competitiveness, improving the quality of human resources, developing agriculture in the rural
regions, implementing an efficient regional policy, improving the transport infrastructure and environment protection.
Having ratified the Agreement on the Accession of the Republic of Bulgaria and Romania to the European Union and with a view to its expiring mandate, the 39th National Assembly passed a number of new acts, as well as amendments to existing legislation aimed at further harmonizing Bulgarian legislation with the Acquis.The major areas where Bulgarian legislation was harmonized with EU law include: registration procedures, banking law, public offering of securities, judicial executory procedure and international private law. The most important changes and innovations concern the start of the register reform with a view to introduce integrated centralized databases providing information accessible via the Internet.
Regarding banking, an act on money transfers, electronic payment instruments, and payment systems has been passed and the amount of bank-guaranteed deposits has been increased. The Public Offering of Securities Act has been amended with respect to: licensing conditions and minimum amount of capital of investment brokers, regulation of the share trust (contract-type fund) as a collective investment scheme and of management company requirements. Regarding judicial execution, the institute of private judicial executors has been introduced. Private judicial executors enforce private claims and are united in a professional community. An important achievement of the legislator is the long-awaited codification of the international private law subject matter through the passed Code of International Private Law. Some acts regulating specific private relations will exist parallel to the Code. Amendments and supplements were also made in some other areas like public procurement, intellectual property, customs regime, etc.
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Gross domestic product
Economic growth. Our expectations of a slowdown in general economic dynamics as early as the beginning of the year were disproved by the first estimate of the National Statistical Institute of the gross domestic product for the first quarter of 2005. Real economic growth is estimated at 6 per cent on the corresponding quarter of 2004 (against 4.5 per cent growth in the first quarter of 2004)1. This is the highest first quarter economic growth compared with growth in corresponding quarters over the past seven years.
In the currently updated quarterly and annual data about economic growth since 1999 we notice that in most cases growth in second quarters and in all cases growth in third quarters exceeds growth in first quarters. Moreover, annual growth for each of the years from 1999 till 2004 is higher than growth in the corresponding first quarter. Could we expect that a similar trend would outline in 2005 – a year of parliamentary elections? (Table 1)
According to our assessment of the dynamics of demand and supply components, growth in the first quarter could be assumed as resulting from short-lived stimulation of growth in credit expansion, with resources being directed mainly towards households’ final consumption, which in turn boosted domestic demand. Subsequent obligations for loan repayments will be at the expense of a slowdown in individual consumption. A certain slowdown of credit expansion to households could also be expected as a result of the assumed constrained households’
creditworthiness despite growing incomes. A major source for steady acceleration to 6 – 8 percentage levels as projected by the main political forces could be: (i) growth in export of goods and services, (ii) development of tourism, and (iii) general reduction of the tax burden.
Table 1. GDP, growth on corresponding period of previous year, %
Q1 Q2 Q3 Q4 Annual
1999 1.1 0.2 3.7 3.5 2.3
2000 5.1 5.8 5.6 5.0 5.4
2001 3.9 3.6 4.3 4.3 4.1
2002 3.5 6.3 6.2 3.5 4.9
2003 3.6 4.6 3.8 5.7 4.5
2004 4.5 5.5 5.8 6.2 5.6
2005 6.0
Source: NSI
Supply. Value added growth of the economy as a whole exceeds gross domestic product growth. In the first quarter of 2005 value added for the economy as a whole grew by two percentage points faster than growth in the previous year (7.1 per cent for Q1’2005, against 5.1 per cent for Q1’2004). However, the item “Adjustments”2 decreased, by 0.1 per cent alone, for the first time since 2001.
This could be explained with the faster growth in the component
“Financial intermediaries’services indirectly measured (FISIM)”
compared with growth in the component “Net taxes (excise, customs duties, VAT, less subsidies) on products”. This is confirmed by the data on sustained high growth in financial mediation value added (32.3 per cent) and a slower growth in imports of goods and services (10.8 per cent, against 16.7 per cent for Q1’2004).
Growth by economic sector. Growth in industry and services accelerated with growth in industry exceeding growth in services whereas agricultural sector decline worsened. The services sector continues to have most significant contribution (3.9 percentage points) to the dynamics of gross domestic product produced, its growth standing at 7.4 per cent (against 5.9 per cent for Q1’2004) and over 52 per centage share in GDP. In the first quarter however, industry posted most substantial growth (8.2 per cent), which not only did not slow down (as we expected based on monthly production and sales indices in the first two months of the year) but nearly doubled compared with the growth in the first quarter of last year (4.9 per cent).
Accelerated value added growth against slower growth in production could be ascribed to slower growth in intermediate consumption. The agricultural sector value added decline typical of the first quarter in previous years worsened (to minus 1.7 per cent, against minus 1 per cent in Q1’2004).
Figure 1. Value added by economic sector, growth on corresponding quarter of previous year, %
Source: NSI
1 Source: NSI, data on national accounts published on 20 June 2005. We should note that the initial estimate of NSI on 2004 first quarter growth was 5.5 per cent, revised downwards to 4.5 per cent with the publication on 31 March 2005 of revised data on GDP for 2003 and on the first, second and third quarters of 2004 and estimates on the fourth quarter of 2004 and 2004 as a whole. Revision of national accounts data is a necessary and inevitable procedure following receipt of additional and more detailed statistics on the indicators under review.
2 In calculating GDP under the production method the following methodological relationship is applied:
Gross domestic product (market prices) = Gross value added (at base prices) + Adjustments, where Adjustments = Net taxes (excise, custom duties, VAT, less subsidies) on the products
less Financial intermediaries’ services indirectly measured (FISIM). The component “Financial intermediaries’ services indirectly measured” in included in adjustments with a minus sign because it represents financial intermediaries’ production assumed to be used entirely for intermediate consumption but as it is not possible to be distributed statistically to the using units – producers, the adjustment is made on a national level.
Growth by type of ownership. Private sector value added grew by 12.7 per cent and public sector value added declined by 8.6 per cent on the first quarter of 2004. At the same time, the number of employed in the private sector increased by some 5.3 per cent and those employed in the public sector declined by 6.6 per cent. Although it is impossible to separate the privatization effect on value added dynamics by type of ownership, we should note the positive fact that private sector expansion (due both to privatization and own growth) is combined with faster productivity growth in the sector (measured as value added per one employed person) compared with the increased number of employed persons in it.
Demand. Unlike the trend in the previous three quarters, typical of the trend in the first quarter of 2005 is that accelerated general economic growth in terms of GDP use is attributable to faster final domestic demand growth and slower investment growth and export of goods and services growth as well as slower export growth compared with import growth. On the other hand, growth in export of goods and services in the first quarter of 2005 slightly accelerated and import growth slowed, compared with the dynamics of previous year’s first quarter.
Consumption. The slowdown in final consumption growth in 2004 (to 5.5 per cent from 6.6 per cent in 2003) was reversed in the first quarter into credit stimulated acceleration. Indication of this is higher individual consumption growth (7.3 per cent from 6.5 in the previous quarter and 4.8 in Q1’2004) than total income growth per household member (5.8 per cent)3.
Figure 2. Exports and imports, growth on corresponding quarter of previous year, %
Source: NSI
Investment4. Тhe trend of a slowdown in investment outlined in the first quarter of 2005 as well. Investment demand growth slowed down to 9.2 per cent compared with the first quarter of last year (22.1 per cent) and the previous quarters. We should remind that throughout 2004 the growth of investment in fixed assets dropped to 12 per cent from 13.9 per cent in 2003. A possible source for acceleration of general economic growth is not growth in the physical volume of investment but rather the higher capital quality and productivity.
Export/import of goods and services. The record GDP growth in the first quarter is combined with a record high share of foreign trade deficit of goods and services in GDP. Despite the higher export growth and lower growth in import of goods and services compared with growth in Q1’2004, the foreign trade deficit of goods and services reached 16.3 per cent of GDP, against a deficit of 13.1 per cent in Q1’2004. The share of import of goods and services in GDP is record high (75.2 per cent) compared with all quarters since the beginning of 1996 (with the exception of the first quarter of 1997 when it was nearly с 85 per cent).
Investment financing. Credit stimulation of households’ final consumption in the first quarter of 2005 caused a sharp change in the structure of sources of capital formation financing. The higher share of gross capital formation (up to 22.5 per cent in GDP, against 21.6 per cent in Q1’2004) is due to external saving growth (to 15.9 per cent in GDP, against 12.2 per cent in Q1’2004) and a decline in national saving (to 6.6 per cent of GDP, against 9.4 per cent in Q1’2004) (Table 2).
Table 2. Gross capital formation financing
Financing, total External
saving Gross
national saving, total
Gross domestic
saving
Current transfers
from abroad,
net
Income from abroad,
net In % of GDP for the period
Q1’2005 22.5 6.6 6.2 3.8 -3.3 15.9
Q1’2004 21.6 9.4 8.5 4.2 -3.3 12.2
Q1’2003 17.2 6.0 7.9 3.4 -5.2 11.2
Q1’2002 17.5 9.6 9.3 2.8 -2.5 7.9
Q1’2001 16.8 9.5 10.5 3.2 -4.2 7.2
Total financing =100, %
Q1’2005 100 29.4 27.3 16.8 -14.7 70.6
Q1’2004 100 43.5 39.3 19.7 -15.4 56.5
Q1’2003 100 35.1 45.8 19.8 -30.5 64.9
Q1’2002 100 54.9 53.0 16.1 -14.2 45.1
Q1’2001 100 56.9 62.6 19.2 -25.0 43.1
Source: BNB, Balance of Payments, published on 16 June 2005; NSI, GDP, published at 20 June 2005, and own calculations.
Current account
3 Household budgets statistics and own calculations.
4 For brevity we use here the term Investment instead of the indicator Gross fixed assets formation which consists of costs for acquisition of fixed tangible and intangible nonfinancial assets, including increase in work-in-progress. Source: NSI.
MACROECONOMIC DYNAMICS
MACROECONOMIC DYNAMICS
Over the first four months of 2005 the current account deficit of the balance of payments deteriorated. Trade balance deficit combined with services, income and current transfers had the greatest contribution to this. The current account deficit worsened to 4.6 per cent of projected annual GDP, against 3.7 per cent of annual GDP in the same period of 20045.
The trade balance deficit (FOB) increased by 4.4 per cent on projected annual GDP, against 4 per cent of GDP over the first four months of 2004. About a third of the trade deficit worsening, EUR 154.3 million, as compared with the same period of the previous year, is due to changes in prices of energy resources.
It is expected that this impact would continue in the next months. The deficit between import of crude oil, oil products and natural gas and export of oil products rose to 1.9 per cent of GDP, against 1.4 per cent in Q1’2004. In nominal terms, exports (FOB) and imports (FOB) increased on January – April 2004 at nearly equal growth rates, 21.8 per cent and 21.3 per cent respectively. Taking into account the effect of higher prices of crude oil, oil products and natural gas, the difference in the nominal growth in exports and imports (19.7 and 18.0 per cent respectively) is more substantial in favour of exports.
Over the four months since the beginning of the year deficit on services also increased due to worsening of the constituent items “Transport” and “Other services”, despite the positive dynamics of the item “Travel”. Thus deficit on services amounts to 0.6 per cent of GDP, against 0.4 per cent of GDP in the first four months of 2004. The positive balance on travel in the period January – April 2005 retained its January – April 2004 share in annual GDP of 0.3 per cent. The item “Other services (net)” for the reporting period is already negative, whereas in the same period of 2004 it was positive.
The negative balance on item “Income” (0.8 per cent of GDP, against 0.7 per cent of GDP in 2004) increased due to the faster increase in income paid than income received. Income paid increased mainly because of the high growth in payments on direct investment (mainly dividends and repatriated profit), an increase of 64 per cent compared with the first four months of last year as well as thanks to increased payments on other investment by 32 per cent.
Net inflow from current transfers decreased (1.1 per cent of GDP, against 1.3 per cent of GDP in 2004). Even though proceeds from money transfer of Bulgarians abroad continued increasing (by 11 per cent compared with last year’s first four months), reduced proceeds from EU pre-accession funds (by 47 per cent) and the country’s increased payments on current transfers (by 78 per cent) caused worsening of the positive balance on transfers.
Figure 3. Current transfers in January – April of
corresponding year, net, in million leva (BGN)
Source: BNB, Balance of Payments, published at 16 June 2005.
The coverage of current account deficit with foreign direct investment worsened to 34 per cent, against 55 per cent in the first four months of 2004. This is a result of both worsening of the current account deficit and reduction of the inflow of foreign direct investment according to preliminary data (1.6 per cent of annual GDP, against 2.1 per cent in the first four months of last year).
Foreign trade
Since the beginning of 2005 foreign trade continued growing at comparatively high nominal pace. For the first four months of the year growth reached 21.6 per cent compared with the same period of 2004. Its future dynamics will be influenced by the following factors: (i) comparatively slow and uneven global economy growth, (ii) slowdown in global trade growth from 9 per cent in 2004 to 6.5 per cent in 2005, and (iii) growing oil prices. To these factors could be added the ever more pronounced need of reform in economic policy of regions which are important for our country, which creates further uncertainty on the market. The positive factors are a sustainable demand for the bulk of raw materials offered by Bulgarian producers and good performance of some Bulgarian companies on international markets, as well export-oriented production of newly established enterprises with foreign state, which is gaining momentum. All this gives us ground to consider that the Bulgarian economy has the potential to maintain high level of exports despite the stagnation on the international market for some items and the weak demand in Euro-zone countries.
Export growth exceeded slightly import growth (21.8 per cent against 21.5 per cent), but the foreign trade deficit (exports FOB – imports CIF) remained high – over EUR 1.2 billion for the four months since early 2005. Although the foreign trade deficit is continuously assumed as posing the highest risk to the Bulgarian economy, so far adequate fiscal policy allows to counter its negative effect, precluding an increase in indebtedness. According to experts of the International Monetary Fund, however, the deficit shows that the Bulgarian economy could not deal with higher domestic demand. A breakdown of the deficit by commodity section shows that (i) there is a permanent surplus in trade in consumer goods, (ii) the deficit in raw materials has decreased substantially compared with
5 Source: BNB, Balance of Payments, published at 16 June 205 – against GDP of EUR 19,433.7 million in 2004 (NSI estimates) and projected GDP for 2005 of EUR 21,177 million.
the first four months of 2004, and (iii) the bulk of the deficit is formed from trade in investment goods and energy resources.
In other words, the main reason behind the deficit are high oil prices and ongoing restructuring of the economy.
Commodity structure of exports. Faster growth in export of investment goods and energy resources reflect on their increased share in total exports, to 15.3 and 8.9 per cent respectively. The hare of raw materials already exceeds 45 per cent due to 50 per cent higher export of non-ferrous and ferrous metals consistent with higher demand on international markets and their good prices.
This growth is unlikely to sustain the second half of the year given the stagnation on the international markets in demand for such raw materials by major producers and their falling prices. Good agricultural crop in 2004 allowed allocation of larger amounts for export and some of these were sold in the first four months of this year. After long-years of constraints for Chinese clothing and footwear they were lifted and the European market has been virtually flooded with them since the beginning of 2005. In this setting, the mere 1.3 percentage reduction in export of Bulgarian clothing and footwear could be considered a success – clearly most of exported Bulgarian items have their specific niche on the European market and do not compete directly with Chinese ones. Steady growth occurred also in export of furniture at the expenses of lower supply of unprocessed timber for external markets.
The structure of imports changed towards faster increase in the share of investment goods and energy resources (from 24.7 to 27.4 per cent and from 15.6 to 17.7 per cent respectively).
The 38 percentage growth in import of energy resources since the beginning of the year compared with the same period in 2004 is due mainly to higher prices. Almost all commodity groups from section “Investment goods” (machines and appliances, electrical machines, spare parts) report higher growth than overall import growth, the import of vehicles growing most (by some 60 per cent). At the same time, the share of raw materials and consumer goods decreased due to their slower growth.
There is nothing surprising in the geographic structure of trade – rather the characteristics we stated are confirmed: (i) EU-25 retained its positions of Bulgaria’s major trading partner with 60 per cent in exports and 51 per cent in imports; (ii) the importance of Balkan countries for Bulgarian trade is growing (21 per cent in exports and over 10 per cent in imports); (iii) foreign trade with Asian countries increased (export growth of 26.3 per cent and import growth of 54 per cent). Surprising is the extremely high growth, by over 70 per cent, of exports to the ten new member states of EU in the first four months of the year compared with the same period of 2004. Their share in Bulgarian exports (5.8 per cent) already surpasses that of Asian countries. At the same time, imports from that group of countries remained unchanged. This allowed for the trade deficit to the “ten” to be halved. Another positive aspect is the
growing surplus in trade with Turkey, which makes up 10 per cent of exports and 6 per cent of imports.
Foreign direct investment
Even though initial data on FDI inflow for the first four months of the year show a certain fall compared with the previous year, incoming information on investor perceptions give grounds to assume that investment would keep at comparatively high growth level. A number of factors contribute to this: economic growth rates in the country, higher degree of harmonization of Bulgarian legislation with the European one, improved business climate, demonstrated support by the State, etc.
Our expectations are that the share of FDI in GDP would be preserved at over 10 per cent and hence their importance for overall economic development of the country.
According to preliminary data, foreign capital invested in Bulgaria in the first four months of 2005 amount to EUR 334.5 million but this figure will certainly be revised several times and ultimately will prove to be twice higher. Announced intentions of green-field investments and reinvestment of profit by foreign investors are at the basis of such forecast. Expected growth in foreign direct investment in 2005 is based on the development of new prosperous areas such as logistics, business services, telecommunications, transport, etc. These would be mainly green-field investments or investments for expansion of existing production. Ongoing improvement of regional infrastructure would play a certain role for their attraction. As Bulgaria’s accession to the EU nears it would become ever more attractive for investors and for outsourcing activities from the services sector in order to optimize costs and improve efficiency.
Aqlthough the importance of strategic investors is broadly acknowledged, the government’s efforts should be directed towards attracting more flexible small and medium investors as Bulgaria does not have potential for developing mass production. Specialization in the production of specific products to cover a specific niche has already proved its efficiency and probably this process would develop further.
Inflation
Consumer prices. At the beginning of 2005 as in every year the NSI updated the weights in the basket for calculation of the consumer price index with information about the structure of annual households’ costs from the previous year. The shares of market foodstuffs and non-foodstuffs declined by some 0.5 percentage points. The share of market services increased by 4.3 percentage points, 3.3 percentage points of this being due to the transfer of telephone services from the group of non-market (regulated, administered, controlled) goods and services to the group of market goods and services. As a result, the share of non-market prices decreased to 21.4 per cent (24.7 per cent in 2004).
MACROECONOMIC DYNAMICS
MACROECONOMIC DYNAMICS
Cumulatively the general increase in consumer prices for the five months since the beginning of this year is 2.55 per cent, and 4.57 per cent in May 2005 on May 2004. The monthly dynamics of consumer prices from January till May 2005 is determined mainly from the dynamics of market prices of consumer goods and services (Figures 4 and 5).
Figure 4. Change in consumer prices on previous month , %
Source: NSI, AEAF
Figure 5. Contribution of market and non-market inflation to general inflation, percentage points
Source: NSI, AEAF
Although prices of market services changed more sharply compared with prices of market consumer goods, the following two figures (6 and 7) illustrate that the dynamics of foodstuff prices predetermines the general dynamics of market consumer prices.
Figure 6. Change in market consumer prices on previous month, %
Source: NSI, AEAF
Figure 7. Contribution to changes in prices of goods and services groups to market inflation, percentage points
Source: NSI, AEAF
Producer prices. Figure 8 illustrates differences in monthly change in prices of individual groups of products included in the index of industrial producer prices on the domestic market.
The prices of energy products changed most significantly.
Figure 8. Changes in producer prices on previous month by product group, %
Source: NSI, AEAF
Figure 9 illustrates the contribution of individual groups of products to the general producer price index. The group of energy products is of note. Apart from being the group with greatest changes in prices, this group has the biggest contribution to overall change in producer prices.
Figure 9. Contribution to changes in producer prices on previous month by product group, percentage points
Source: NSI, AEAF
Typical of producer prices is a broad amplitude of monthly change compared with consumer price dynamics. This is typical of an economy in the conditions of stable economic growth (Figure 10).
Figure 10. Change in consumer prices and industrial producer prices on domestic market, previous month =
100 (%)
In the three months of second quarter NSI business surveys register absence of inflationary expectations among polled business communities in industry and retail trade, but presence of inflationary expectations in construction. Inflationary expectations appear in June (Table 3) for services.
Table 3. Expectations in corresponding month of 2005 of increases in selling prices in the next three months
I’05 II’05 II’05 IV’05 V’05 VI’05
Industry presence absence presence absence absence absence Construction absence presence presence presence presence presence Retail trade absence presence presence absence absence absence Services
(excluding retail trade)
absence absence presence presence presence presence
Source: NSI, Economic situation, monthly business surveys of NSI in 2005
Employment, productivity and unemployment
Data from labour force survey show that higher economic growth in the first quarter of 2005 (6 per cent, against 4.5 in Q1’2004) is combined with slower growth on an annual basis of the number of employed persons (1.9 per cent, against 3 per cent in Q1’2004) and faster decline in the number of unemployed persons (by 15.6 per cent, against 14.2 per cent in Q1’2004).
Employment. Economically active6 in the first quarter of 2005 were 3,201 thousand persons, or 12 thousand less than in Q1’2004). The number of employed persons has increased by 54 thousand and that of unemployed persons has decreased
by 67 thousand. The number of employed persons in the private sector has increased by nearly 90 thousand and those employed in the public sector have decreased by 40 thousand compared with last year’s first quarter. The private sector has produced 77 per cent of the value added in the economy with the labour of 69.6 per cent of all employed persons in the economy. Little over 5 per cent of employed persons in the private sector are employers, hired persons account for 80 per cent and 11 per cent are so called self-employed and the share of non-paid family workers is the smallest – below 2 per cent of employed persons in the private sector.
Productivity. A very good sign of the quality of overall economic growth in the first quarter of 2005 is the fact that growth in labour productivity measured as gross value added per one employed person exceeded employment growth. In the past year employment dynamics was higher, calculated on the basis of available quarterly data from labour force survey since 2003.
Figure 11. GVA, employed persons and GVD per employed person, total for the economy – growth on corresponding period of previous year (%)
Source: NSI and own calculations
Unemployment
The first quarter of 2005 is a third in a row in which the number of unemployed persons is below 400 thousand according to labour force survey. The unemployment rate (according to labour force survey methodology) fell to 11.3 per cent or two percentage points less than in the first quarter of 2004. In the first quarters of the previous two years the unemployment rate was seasonally highest. Possible high growth during the year would probably contribute to a further fall in the number of unemployed persons and the unemployment rate.
Long-term unemployed persons (1 and more years) in the first quarter total 206.1 thousand, and the share of this risk group in the total number of unemployed is by some 3 percentage points lower than in the first quarter of 2004.
The number of discouraged persons also declined by 72.8 thousand, or 16.1 per cent on the first quarter of 2004.
6 Economically active population comprises persons above the age of 15 who furnish their labor (employed persons) or supply their labor (unemployed persons) for the production of goods and services.
